Canada not ready for major offshore spill: watchdog

OTTAWA Canada's offshore petroleum boards are not equipped to cope with a major spill, the country's environmental watchdog warned on Tuesday in a report that also said the booming energy sector needed more oversight.

Environment Commissioner Scott Vaughan said in a report that unless Canada improved its record on environmental regulation, resource customers might be deterred.

His conclusions are sensitive for the ruling pro-business Conservatives, who expect some C$650 billion ($650 billion) of new investments in natural resource projects over the next decade and want more extraction of oil, gas and metals.

"Considering the central role of natural resources in today's Canadian economy, it is critical that environmental protections keep pace with economic developments. In this report ... we found numerous shortcomings," Vaughan wrote.

Vaughan also said that Canada was set to reduce direct spending on the fossil fuel sector as part of an international push to phase out subsidies.

He said the two offshore petroleum boards operating in Atlantic Canada, in the provinces of Nova Scotia and Newfoundland, were not adequately prepared for disaster. The boards are run jointly by Ottawa and the provinces.

Offshore development was expanding even as Ottawa made slow progress establishing marine protected areas, he added.

Four oil projects off Newfoundland produced around 100 million barrels in 2011. Production off Nova Scotia is limited to natural gas for the time being.

Federal Environment Minister Peter Kent said Ottawa was reviewing the responsibilities of the various organizations charged with tackling oil spills.

"Our government is committed to developing Canada's rich natural resources while strengthening environmental protections," he said in a statement.

Critics regularly accuse the Conservatives of ignoring the environment. Canada, home to the world's third largest proven reserves of crude, is already the largest exporter of energy to the United States and last year the government made it easier to get permission to build mines and pipelines.

Exports, half of them from natural resources, make up around 30 percent of Canadian gross domestic product.

The government strongly backs increased extraction from the oil-rich tar sands of Alberta. Stripping out crude from the clay-like sands requires more energy than regular oil drilling, a fact which is already causing Canada trouble abroad.

The European Union is set to vote later this year on whether to classify tar sands oil as particularly dirty.

U.S. President Barack Obama delayed approval of TransCanada Corp's proposed Keystone XL pipeline from the tar sands to the Gulf Coast after opposition from green groups.

"A key challenge in expanding Canada's development and export of natural resources ... will involve meeting or exceeding the environmental standards and consumer expectations of foreign markets," said Vaughan. "Therefore it is vital from an economic perspective that Canada's environmental protections keep pace with economic development."

($1=$1 Canadian)

(Reporting by David Ljunggren; Editing by Neil Stempleman and Sofina Mirza-Reid)